Diabetes spinoff, C-suite shakeup, costly tariffs: Inside Medtronic’s busy quarterly results

When patients think of Medtronic, their minds may first wander to pacemakers, but then diabetes products such as insulin pumps and pens.

Soon, this will change.

Medtronic, which is run from offices in Fridley, announced plans to spin off its once-strained but now-growing diabetes business into an independent company, allowing the medtech giant to focus on high-growth markets such as pulsed field ablation technology treating atrial fibrillation.

In an interview, CEO Geoff Martha called the spinoff a win-win situation.

“This accelerates the direction of travel financially for us to higher margin,” Martha said. “And it provides the focus we need to achieve that.”

The spinoff news came during a busy quarterly financial report for Medtronic, which also announced Wednesday costly tariff impacts of up $350 million, executive shakeups and earnings beating Wall Street expectations.

A J.P. Morgan Chase analyst note following the news begins, “There is a lot to unpack.”

It has previously experienced recalls, sales declines and manufacturing issues, drawing U.S. Food and Drug Administration warnings. The regulators’ warnings delayed an important insulin pump approval, squeezing the company’s market share, Evercore analyst Vijay Kumar said in an interview. He said some had wondered, “Why don’t you spin this thing?”

Recently, the business has bounced back. It has experienced six consecutive quarters of double-digit growth after the company installed new management and doubled down on its strategic focus and investment, Martha said.

After the spinoff announcement, Kumar wonders, “Why now?” The company’s stock fell about 2% Wednesday.

Kumar called the decision “neutral-ish.” He said some could question if the decision is dilutive to the company’s future growth, although he views the company providing positive earnings outlook inclusive of the impact of the spinoff as a good thing.

In an analyst note, JP Morgan’s Robbie Marcus said he is surprised Medtronic is spinning off a “growth-accretive business” and cautioned that “trading organic growth for margin does not create shareholder value in MedTech.”

“And in this case, if we would have done that,” Martha said, “I think it would have hurt patients. So we did not do that. We invested.”

The separation is expected to wrap up within 18 months, with a preferred route of an initial public offering, the company said. After the separation, the change is expected to be immediately accretive to Medtronic earnings, operating margin and gross margin.

Que Dallara, president of Medtronic Diabetes with more than 8,000 employees worldwide, will become CEO of the new company. She said the business has an “extremely robust pipeline” and is focused on bringing down patients’ average A1C levels, which show how well blood-glucose is being managed.

“We’re now on the cusp of launching the third-generation system: the new [continuous glucose monitors], new insulin dosing options, patch, pen, pump, and new algorithm,” Dallara said. “And so we absolutely believe the growth is durable.”

Medtronic’s tariff headache is different than most companies’: The duties are hammering its exports to China.

Thierry Piéton, in his first call as Medtronic’s new chief financial officer, said the company expects tariffs to cost $200 million to $350 million for next full fiscal year. The wide range, he explained in an interview, depends on whether tariffs on China come back in full force after a 90-day pause. Martha said the company is a net exporter to China and does not have a lot of exposure to U.S. tariffs on Chinese imports.

To mitigate tariffs, the company is working to qualify for as many humanitarian exemptions to import taxes as possible, reroute some logistics flows and control discretionary costs, Piéton said. Shifting the manufacturing footprint is more difficult due to the strict regulatory standards on production facilities, he said.

“Changing where we do manufacturing is not something we can do overnight,” Piéton said. “It is something that we will have to look into over time. But short-term, that’s not the key lever.”

Tariffs aren’t new to Medtronic. Company executives in 2019 said tariffs on Chinese imports in part fueled hundreds of millions in new costs.

Martha said the company is communicating with President Donald Trump’s administration. AdvaMed, the powerful industry trade group, has advocated for broad exemptions from import tariffs. So far, the administration hasn’t budged despite exempting products such as books, smartphones and pharmaceuticals.

In Wednesday’s earnings report for the three months that ended April 25, cardiovascular sales of $3.3 billion led the company’s four business groups. Cardiac ablation products reached $1 billion in revenue for the whole fiscal year, and the company expects to double this by acquiring more global accounts treating the heart condition with electric pulse technology.

But now, the head of the massive heart division, Sean Salmon, is leaving the company. The company did not specify the reason for the departure.

“Sean has been responsible for leading a number of our successes,” Martha said during a call with investors. “He leaves a legacy of having developed strong capable leaders in our cardiovascular businesses as well as a robust technology pipeline, both of which are responsible for driving the CV growth acceleration you saw this quarter.”

Kumar said the timing of the departure stood out and the company needs to explain it.

“The timing certainly was not the best, when you have the key products launching within the segment,” Kumar said. “So it seemed off.”

The diabetes business reported $728 million in sales for the quarter, growing 12% on an organic basis over the previous year. Growth was slowest for the company’s medical surgical division, which increased 2% on an organic basis.

Regarding diabetes, while most Medtronic device sales are often business-to-business, the diabetes division sells products directly to consumers, Martha noted. The business is in “a really good spot,” he said.